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MarineMax, Inc. (NYSE:HZO) is a small-cap stock with a market capitalization of US$421m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into HZO here.
HZO’s Debt (And Cash Flows)
HZO's debt levels have fallen from US$308m to US$271m over the last 12 months . With this debt repayment, HZO's cash and short-term investments stands at US$39m to keep the business going. Additionally, HZO has produced US$62m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that HZO’s operating cash is sufficient to cover its debt.
Does HZO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$333m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.56x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty Retail companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is HZO’s debt level acceptable?
With a debt-to-equity ratio of 75%, HZO can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if HZO’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HZO, the ratio of 6.37x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as HZO’s high interest coverage is seen as responsible and safe practice.
Although HZO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around HZO's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure HZO has company-specific issues impacting its capital structure decisions. I suggest you continue to research MarineMax to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HZO’s future growth? Take a look at our free research report of analyst consensus for HZO’s outlook.
- Valuation: What is HZO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HZO is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.